RRSP/RRIF

What happens to your RRSPs when you die?

When we think of RRSP planning, we often think about whether it makes sense to buy RRSPs or how to invest your RRSPs. One question we may not think about addressing right away is “What Happens to your RRSPs when you die?” Although it’s not something we like to think about it is an important issue with RRSPs, especially when it comes to tax.

On death, the RRSPs are deemed to have collapsed. The tax consequences really depend on who is listed as the beneficiary of the RRSP. The general rule for an RRSP or RRIF is that the value of the RRSP or RRIF at the date of death is included in the income of the deceased for the tax return for the year of death

There are three exceptions to this rule where the tax can be deferred if the beneficiary of the RRSP, RRIF, or estate is one of three parties:

  1. the spouse (includes common-law partner)
  2. financially dependent child or grandchild under 18 years of age, or
  3. financially dependent mentally or physically infirm child or grandchild of any age.

Your spouse as the beneficiary

The spousal rollover provision allows a spouse that is listed as the beneficiary to rollover the amount of the deceased’s RRSP into their RRSP without any tax consequences. Obviously for planning purposes, it is wise in most cases to list a spouse as a beneficiary.

Dependent child or grandchild

If a financially dependent child or grandchild under the age of 18 is the beneficiary of the RRSP, the dependent child under the age of 18 can roll the RRSP into an annuity that pays the child to the age of 18. For example, a 7 year old who is the beneficiary of a RRSP can have the RRSPs rolled into an 11-year annuity, which would spread the tax over an 11-year period.

Dependent infirm child or grandchild

For dependent infirm children, the amount received can be transferred to an RRSP set up for the child, meaning the funds will not be taxed until the funds are withdrawn. It is important to weigh any tax savings against the practical issues related to having funds go into the hands of an infirm child.

Other considerations:

What happens to the Home Buyers Plan at death?

If there is an outstanding balance remaining in the RRSP home buyer’s plan, the outstanding balance will be included as income on the deceased’s final income tax return unless the spouse was named as beneficiary and had taken out a home buyer’s amount at the same time. In this case, the beneficiary has two options:

  1. the outstanding amount can be added to the final tax return of the deceased spouse or,
  2. the entire RRSP, including the Home Buyers’ Plan balance, can be rolled over to the beneficiary’s RRSP.

Successor annuitant for RRIFs

For RRIFs, when naming your spouse as beneficiary, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the “successor annuitant” to the RRIF.

If a successor annuitant election is not made, the deceased’s RRIF will be collapsed causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse. There may be several disadvantages to this. It may not be a good time to sell the investments in the RRIF or there may also be selling costs to consider. Also, there is the issue of preparing all of the paperwork at a difficult and stressful time for the surviving spouse.

The successor annuitant designation is effortless. The spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.

Listing a charity as a beneficiary

The most significant changes affecting estate planning relates to the ability to receive a credit of up to 100% of taxable income for donations made through a Will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his/her Will.

This is a great opportunity for individuals to donate money to their favorite charity that would have otherwise gone to the government in the form of taxes.

Listing the estate as the beneficiary

Many people choose not to do this for two reason. Firstly, the amounts become fully taxable to the estate and secondly, the RRSP form part of the estate and are also subject to probate fees. If there is no spouse, many people prefer to list their children as beneficiaries, which can help avoid probate but not tax. In this case, it is important to watch the tax trap that can occur when someone other than the spouse is listed as a direct beneficiary of the RRSPs or RRIF.

Don’t die with too much RRSPs

I’ve said it before and I will say it again . . . the worst thing you can do is die with too much RRSPs. It may sound odd because most people are supposed to spend their money in retirement but far too often people get focused on deferring RRSP income so they do not have to pay tax and the fear of running out of money. As you can see, it is critical that people take the time to do some proper estate planning, which includes thinking about beneficiary designations. More importantly, I encourage people to think about a spending plan for their RRSPs as part of their overall financial plan. Choosing the right beneficiary is a significant part of estate planning.

Comments

  1. Richard Rinyai

    It’s interesting that I was just thinking about this topic last night, while reading your blog. Excellent information!

    Thanks,

    Richard

    • Jim Yih

      I guess that’s called Karma! Thanks for stopping by and commenting.

  2. the blunt bean counter

    Excellent summary–however as a tax accounant I can tell you several times when I do estate work for someone not my client, the RRSP beneficiary is often the ex. It is very common that people forget to change their beneficiary designation after a divorce. The expletives when they realize this, flow like vemon 🙂

    • Jim Yih

      That’s a really great point. I saw that a few times myself. Everyone go out and review your beneficiary designations on the RRSPs to make sure your ex is not listed.

  3. Jeff McKechnie

    What happens if your spouse(wife) who you have named as successor annuitant dies and you now have a common law situation(woman) but you have not changed the annuitant. Does the common law spouse automatically get the money from the RRIF or does it go to the estate upon the husbands death

    • Jim Yih

      Hey Jeff, It’s a little more complicated than that. The right advice is to update your beneficiary or successor annuitant. It’s not hard to do, just call up your advisor or financial institution. The other thing to do is update your will and make sure you beneficiaries are aligned.
      Good luck!

      • Jeff McKechnie

        Can you recommend who I talk with. I am referring to my Dad. My Mom died and he is now with another woman –common law. My Dad has left her money in his will o I want to make sure she does not get more –IE his money in his RRIF. If he has not named a successor annuitant other than my Mom who died, where does his RRIF Money go –His Estate or to his common law spouse. Can you guide me to someone who can answer that question?

        Thanks

        Jeff

  4. Edward

    What happens if say there are three beneficiaries named on an RRSP(one spouse and two of the children). Upon death of the contributor, do the funds get divided equally in three? If so, would the portion going to the spouse receive the tax-free rollover while the portion going to the children be taxable to the estate.

    Thanks in advance. Sincerely, Edward.

  5. Alex

    Hi Jim,
    Let’s say that Mr. Smith has designated his wife as a beneficiary, but both Mr. Smith and his wife pass away in a plane crash. Who would the RRSP go to in that case and is there a way to designate another beneficiary in the case of the death of both simultaneously? Thank you.

    • Jim Yih

      Yes Alex
      Most institutions will allow you to designate an alternate beneficiary. It’s good to list an alternate beneficiary for the situations like the one you pose

  6. Gary

    Ok, this maybe complicated(for me certainly). My aunt is soon to pass away. Her husband died about 8 years ago and he designated his children(my aunt’s step-children) as beneficiaries to his RRSP’s. Can those RRSP’s be transferred directly to the step children wihout my aunt having to pay the taxes on them? I believe I was reading somewhere that stated that my aunt would have to pay the taxes on them, even though the step’s would benefit from receiving the RRSP’s. Sounds very “taxing” on my aunt’s estate, if true.

    • Gary

      Geez, this question hits home really good. In fact, this question, and the circumstances, sound like this could have been me asking this question. I just completed executing my aunt’s estate and she too had step-children whose father bequeathed them his RRSP’s. The amount of RRSP’s will not be taxed through probate, but will be taxed as part of her final estate taxes. This was in British Columbia.

  7. John Buda

    What happens to your funds when your beneficiary dies? Does it then go to their beneficiary? Worst possible case, what happens if there is no beneficiary named?
    Thanks
    John

  8. Leslie Stipic

    Can someone please answer this question. I am separated not divorced yet. Most of our rrsp funds were/ are in my soon to be ex husbands name. He is living with someone else now and he is de laying the divorce. If he dies before equalization are half of the rrsps still mine. What if he has named his girlfriend as the beneficiary.

  9. JR

    Hello, What will happen to the money if both the owner and the beneficiary pass away on the same time? Thank a lot.

  10. TK

    My dad had no designated beneficiary and my mom passed away 2 years ago which makes me the next of kin, an only child or adult now. Do I need a lawyer to assist me to obtain these funds or do I just contact his bank with these rrsp papers and explain this situation. For some reason, I don’t think his bank will release these funds to me.

    • Dave

      Is there a Will?

      The investments ill go to the deceased’s Estate from the Bank and they will very likely require Probate of the Will before releasing them to the Estate.

  11. Liza Mae

    My in law’s recently updated their wills. They informed my husband, their son. Of some of the details. For instance, that he and his sister are co-executors. They have 2 million dollars in “investments”. Now should they die, I assume the “investments” are to be divided between the brothers. My question is, if these are RRSP investments. Are the automatically cashed and taxed? Or can they be rolled into my husbands RRSP?

  12. Kathy

    RRSP: it is the value of the RRSPs as at the date of death is that must be added to the final tax return. Then the RRSP will be closed; If investments are held in a self-directed account, then the investments can then be split in 2 and transferred into each beneficiary’s (non-registered) investment account. Or they can be sold and the cash be paid to each of the beneficiaries.
    For the investments outside the RRSP, they are deemed sold, meaning the value as at date of death must be determined as well as the cost (which for some investments may be different for tax purposes than the actual cost), and the resulting capital gain is what will be added in the decease de final tax return. The investments can then be split and transferred to each beneficiary; or sold and cash paid to each beneficiary.

  13. Kathy

    Edit above… I just re read the question, I initially thought there were only 2 beneficiaries, which is why I said the assets will be split in 2. In fact it will be split and divided among the # of actual beneficiaries.
    And to be clearer, when going from parents to children, in most cases, RRSP investments will not go to the beneficiary’s RRSP as the RRSP is de registered upon death. Read the article above.

    • Dave

      Also lets say that son #1 is specifically designated RRSP account # XXXXXXXXX in the Will, and others are designated to split the residue. The son will be entitled to the full untaxed amount of the RRSP and the tax will be paid from the residue unless the Will expressly states otherwise.

  14. Sundy

    I’m divorced.. My husband passed away.. He left me two rrsp’s..if he owed money on bill’s.. Do they take money from the rrsp’s..??

    Sundy

  15. Bruce Michael

    If there is no benefiary listed with the holder of the RRSP but the spouse is listed as beneficiary in the will, can the RRSP still be transfered taxfree?

  16. Maria

    I am a Filipino and married to a Canadian and he passed away 2013. I just recently claimed his rrsp and paid 25% withdrawal tax. Do I have to include the amount of money I gotvfrom rrsp in filing my 2015 income tax?

  17. Maria

    Hi I am a Filipino Citizen and was married to a Canadian. My husband passed away July 2013 amd just recently (2015)I got his rrsp and paid withdrawal tax of 25% as a non Canadian resident. Do I have to include the amount of money I got from rrsp in filing my income tax for 2015?

  18. Peter

    Hi my Bother passed away without a will. He was single and had no childern and his mother and sister have signed off on his estate.Am I the Bother entitled to the RRSP’s if I paid All his affaiers?? Funeal,truck debt credit cards????

  19. Kathy

    Two issues here.
    1st, you could be reimbursed by his estate for the funeral expenses and debts that you paid on behalf of his estate. As a matter of fact the CPP ( or if in Quebec, the QPP) will pat 2500$ to the person who paid the funeral expenses. The funeral home sometimes will help with this papwork.
    Secondly, Even if no will, your brother may have named a beneficiary in the RRSP contract. This must be determined.
    Also note at time of death, the RRSP is deemed sold and the value at time of death is added as income in the final tax return you mist file for your brother. Theses taxes must also be paid before distributing what is left from the estate after all the debts and taxes are paid.

    To settle the estate, an administrator is named who will take care of the estate ( obtain death certificate, do will searches do confirm no will, advise banks he dealt with and all services of his death, drivers permit, where he lived, etc). Perhaps this step has been done? Also the administrator must final tax returnsand get clearance fromCRA that no taxes are owing, Only then will final distribution to heirs be done.

  20. Martha Ben

    My husband and I plan to divorce but still want each other to receive our rrsps upon death. Can we simply stipulate thus either in a will?

  21. Dave

    RRSP’s. Can and should have a named beneficiary so they pass outside of the Will.

    The same applies to TFSA accounts.

    Get independant legal advice. Both , Wills and the beneficary designations can be changed later… Without each others consent!

  22. Mart

    Does the RRIF have to be collapsed (securities sold) at death or can the beneficiary pay the tax owing on the market value and transfer ownership?

  23. Scott gerard

    Hi Jim:
    My sister passed away recently, she named her two children as beneficiarie of her rrsp I am of the understanding that the rrsp should be collapsed asap and the funds distributed directly to the beneficiarie. Her spouse will than file a death tax return and her estate will be responsible to pay the tax.
    If the estate does not have enough money to pay the tax than cra could choose to go after it from the beneficiary.
    The financial planner seems to be stalling and talking in circles when it comes to collapsing the rrsp. It should be noted that my sisters husband is related to the financial planner and that the kids are his step kids.
    The planner is suggesting that the kids open accounts with him and than he will transfer the funds from the rrsp and than hold onto the apprpriate amount of tax that would be owing.
    Since the rrsp doesn’t have to go thru probate isnt the planner obligated to collapse the rrsp and distribute the money asap.
    Scott

  24. Kat

    Hello my mother in law died and she had some RRSP’s which she had my husband and brother named as beneficiaries. The financial institution withheld 30% tax and dispersed the funds. The rest of the estate is a mess though and could be insolvent. We have nothing to do with the estate nor are we beneficiaries or executors. Other than the income tax can creditors come after the money we received from the rrsp?

  25. Bruce Michael

    When a beneficiary is designated in the RRSP, the funds are outside of the estate, and it should have no claim on the funds. The 30% that was withheld is for income tax, and the estate will have no claim on it either. You will have to include the money received as income, and will have to pay tax on it, but the amount withheld will be offset against any additional taxes that you might incur. If you have any RRSP contribution room, you could put the amounts received into your RRSP, which would mean that the tax withheld could be applied to your other income or result in a refund.

    • mark

      This is news to me. I always thought the owner of the RRSP was taxed at year of death unless the RRSP was transferred to their spouse or other qualified beneficiary

      • Dave

        Bruce Michael …. you are completely wrong. I agree with mark. If an RRSP is given to anyone other than a spouse the full amount of it is taxed on the deceased’s final tax filing.

  26. Jon

    What happens when the RRSP holder does not have a wife or common law? Can the money go to neice or friend? Or is it up for grab by the fund manager? That is robbery. Is it not still cheaper, to withdraw the money in 3-4 installments before turning 71?

    • Dave

      You may give it to anyone you want but the full amount of the RRSP will be taxed on the deceased’s final tax return.

    • Mark

      “Should you die while you still own your RRSP, its entire value must be included in your income in the year of your death unless your spouse or common-law partner or your financially dependent child or grandchild is entitled to the funds. If you designate your spouse or common-law partner or financially dependent child or grandchild as beneficiary of your RRSP, the proceeds from the plan will be taxable in your beneficiary’s hands in the year they’re received, unless they are transferred into his or her own tax-deferred plan.”

      The fund manager gets nothing but the CRA will take almost 50% of a sizable RRSP upon death. You can minimize taxes with installments, see tax rates here:
      https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html

  27. Dave

    It would be interesting to know if there is a potential tax liability to the institution that pays out a RRSP to a named beneficiary, withholds 30%, but that amount is insufficient to pay the deceased’s final amount owing to the CRA. As you point out the liability on an RRSP could be 50%.

  28. Barry Cockerill

    Hi Jim,
    The scenario I present is that each spouse has an RRSP/RRIF and one spouse dies and the other spouse is listed as a direct beneficiary of the RRSP or RRIF, thus ending up with both RRSPs/RRIFs. Then the surviving spouse remarries and makes the new spouse the direct beneficiary of both RRSPs or RRIFs. Is this valid with CRA? Obviously, this could continue repeatedly.

  29. RUTH

    Jim

    Thanks so much for your blogs. They are informative and usually bang on point. Thanks for making complicated issues understandable to the masses. I really appreciate your work. Cheers

  30. Elizabeth

    My sister named me the beneficiary of her RRSP. Since her death, I have now visited a bank branch and provided them with her death certificate, and shown my identification. How long can I expect it to take for them to provide the funds? I am told the bank’s financial planner will contact me to get information for paying the funds, but have not heard anything.

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